The gold standard, sure, but where is the gold?

Economics Economics Questions
1

Juxtapose the following excerpt from the synopsis of “The Case Against the Fed” from the Mises store:

Rothbard calls for the abolition of the central bank and a restoration of
the gold standard.

With a notion set forth a documentary entitled “The Money Masters”: that 70% of the world’s gold is owned by a very small group of people.

Additionally, the same documentary cites the American Civil War as a time when American bills were produced to fund the war. These monies were not backed by anything but were immensely successful and debt-free (no interest).

I’m very excited to hear what some of you think with regards to this information. I have recently begun a journey down the rabbit hole of politics, history and economics. It’s fascinating and very scary at the same time.

2

The market place will determine what is money and what isn’t. And the market place has done so in the past. In the most free banking system to ever exist in Scotltand, gold was used for large transactions and silver for smaller ones. That is not to say that diamonds or copper or any other commodity could be used as the medium of exchange as they could be. The nice thing about commodity money is that it is relatively scarce compared to printed paper or worse electronic money.

So as the price of gold goes up, more transactions will take place in alternatives.

Also keep in mind that in the Scottish system and in the US when the government closed the central bank, banks would take in deposits of gold or silver and issue notes that holders could redeemed for gold or silver. These notes were as good as the bank. That is a whole lot better than being as good as the Full Faith and Credit of the US Government.

3

IIRC, Greenbacks were not immensely successful. At one point they were trading at a 50% discount to gold.

4

The nice thing about commodity money is that it is
relatively scarce compared to printed paper or worse
electronic money.

I’m familiar with this sentiment. My interpretation of it is that the total numerical value of all available monies is restricted by some physical counterpart (e.g. silver or gold). Additionally a ratio is defined between the two (e.g. one ounce of gold is worth 20 dollars).

The view espoused in the documentary was that population (and a “price index” of some kind… I’m fuzzy on this part) would be the abstraction by which total available monies is determined.

So there is a constraint, but it is not based on metal. This actually makes more sense to me because there is a finite amount of metal in the world, but our potential to procreate is limited only by our resources.

5

You have to be careful listening to “The Money Masters”, since it’s a mix of truth and completely wrong and misguided economic policies.

What’s correct about that “documentary” is that fractional reserve banking enrich the few at the expense of the many.

What’s wrong is almost everything else.

They fail to understand a basic economic law, which is that the size of money supply doesn’t matter, any size is optimum for the economy to function properly.

They beleive that increasing the supply of money causes prosperity, and the only thing wrong about it is that it enriches private indivudual. Same for the FED. What they critisize is not that it exploits the poor, but that it enriches private banks and that it’s “secret”. What they promote is a FED but totally controlled and run by politicians and bureaucrats.

There’s so many things that are wrong in the documentary that it makes an uninform public know even less about sound economics than before he watched it. For instance, tally sticks were not money, they were mostly bonds certificates. They were not even homegenous goods. Continental scripts didn’t create prosperity, they were all inflated out of existance. Ben Franklin was pro-fiat money because he owned a printing press (literally) and had government contracts to print the money himself.

The whole documentary is a primitivo-socialist rant against what is “private”, “secret”, and glorifies the government. They promote a masively inflationary government managed money, without realizing that it’s exactly what we have now.

To answer your specific question, I seriously doubt that “70% of the gold supply” is in the hand of a small group of people. Rich people don’t hold they wealth in gold, they hold land or financial assets. Central banks hold about 12-18% world money supply, depending of the source, and that’s already a huge part.

But anyhow, it wouldn’t matter, since money holdings represent always a very small part of the total wealth in an economy, and for it to confer any advantage to their holders, they have to spend it.

6

I have been thinking the same thing. This seems to be the big conflict between the Chichigo School and Austrian Schools of economics. If I understand the Austrian view correctly, using gold as the medium of exchange would eventually cause the wealth to flow into the hands of the most productive. I wish someone with a stronger understanding of Austrian economics would address this question.

7

Right now, there is no physical connection between money and commodities. Money is printed out of thin air, in a completely arbitrary manner.

Growing or decreasing the money supply based upon population is pure quackery. The Money Masters are not an authority on monetary policy or history, you have to be careful with following them.

The constraint has to be logical. By population is not logical.

8

The whole documentary is a primitivo-socialist rant against
what is “private”, “secret”, and glorifies the government. They
promote a masively inflationary government managed money,
without realizing that it’s exactly what we have now.

Thank you for the differing perspective sergebeauchamp.

I intend to read, at a bare minimum, three titles from the Mises store: Economics for Real People, The Politically Incorrect Guide to Capitalism and The Politically Incorrect Guide to the Constitution to lay a foundation for understanding other material.

Earlier today I found the American Monetary Instititute. I’m uncertain what their views really are due to a terrible design, but they do have some material expressing strong disagreement with the Austrian school of monetary thought. From their website: “Here’s why the AMI considers the Austrian School as monetarily illiterate and not having done their homework…”.

Does anyone have any experience with, or opinions regarding, the AMI?

9

Have you tried the forum search function? I know it has been addressed at least a half dozen times this year, as I recall reading several explanations of it.

Although, I would say that wealth should flow towards the most productive, because otherwise it is flowing towards the least productive, or remaining static (socialism).

10

Yes, money flows in the economy to the most productive members, but hoarding money doesn’t make one rich much. Investing does.

Warren Buffet and Bill Gates didn’t get wealthy by accumulating a big stock of money, they invested it.

11

I’m not qualified to read that critique of Menger but every once in a while, some guy writes a paper or book that debunks Austrian theory, but isn’t peer reviewed, and when rejected from the Austrian journals, goes on a tirade against Austrianism.

Austrian theory is not difficult to learn, and conforms to common sense and observation. I’d recommend looking further into it and posting questions or challenges you have here. There are any number of scholars who would be willing to address them.

12

Thank you, I watched the Money Masters video and knew their conclusions were off but was having trouble seeing exactly why.

13

First, the gold standard wasn’t just a gold standard. The Coinage Act of 1792 included gold, silver, copper, and nickel for using precious metals for various denominations. You could carry around today’s equivalent of $800.00 with 1 oz. of gold as opposed to carrying a stack of 40 twenty dollar bills.

Anyway, the scarcity of gold would have two free market responses:

  1. People would have higher incentive to dig for more gold diluting the 70% held in the hand’s of a small group.

  2. That small group would have incentive to spend their gold.

The free market, when fully operational, favors a decentralization of wealth. This is why the “Trust” met together to formulate the Federal Reserve in 1910. They were losing market shares from the advantages they gained from legislation in the 1870s. Smaller banks were popping up every where and were actually loaning money they had instead of fractional reserve banking. The Government was paying down it’s debt and was on it’s way to being out from under the burden of debt it carried. They wanted to do more then rearrange the deck, they wanted to own the whole casino. So they met with Senator Aldrich to form legislation that would continue this rate of capital extraction in a way that was in their favor. And thus the Federal Reserve was born. I will remind you that at that time those seven people who met to form the Federal Reserve easily represented over 1/3rd of the entire planet’s wealth.

Putting the printing press in the hands of the legislators instead will take things from bad to worse. In fact, there is no authority for that in our Constitution either. Our Constitution says in Article 1 Section 8 that Congress was authorized to COIN money. Not CREATE money. No individual or group should be left with that power and our founders understood this(with the exception of Alexander Hamilton).

Suppose that small group holding 70% as you allege, what good would it do them? The prices would automatically adjust to the 30% in circulation and if they introduced it back into the economy, the prices would readjust and they would no longer have 70%. So unless they actually contribute something extremely worthwhile to the economy, they wouldn’t be able to keep 70%, and even if they horded it, that would do them no good either.

14

Yeah, I read their position before.

They fit right in “The Money Masters” crowd.

The author, Zarlenga, uses arguments such as quoting aristotle on money and concluding that since he is ancient, and “closer to the [historical] origin of money”, his point of view must be more correct than say Mises, who lived in the 20th century (see his powerpoint presentation).

Zarlenga is profoundly ignorant of economics theory, and they discourage their following from reading economic treatise, since according to them they would “corrupt their mind”. He is an historisist that beleives that thuth comes out of quoting famous people (mostly politicians).

One book (available for free on this site) that I strongly recommend is Rothbard’s “What has our Government done to our money”.

Then read Mr Zarlenga’s paper, and I think his limits will be obvious to you.

15

therealjjj77, sergebeauchamp and everyone else:

Thank you! This is exactly the kind of information and reasoning I was hoping to find here.

Through another post here I found a PDF version of “Economics for Real People” which I will begin reading immediately. I’m so glad I found this place (actually I can thank Ron Paul’s recommended reading list at the back of his book, The Revolution).

16

I personally like the hours unit like they use in Ithaca, NY found here. Money that is based on labor, I think is better then fiat and precious metals combined.

17

Not every hour of labour (even doing the same task) is equal, and not everything laborious is valuable.

18

That’s right.

Worse still, it’s an attempt to do price fixing the wages across the board. Since they finally admit that some work can be worth more “Ithaca Hours” than other, it undermines the whole premise of printing an “work hour” note.

It’s also an inflationary scheme where the central issuer of the notes can just print more and more at will.

What, you did some “work” for 2 hours and didn’t get paid? Let me print some dow for you! :slight_smile:

At the end of the day, it’s just a tourist token limited to that city, and would never grow to widespread usage.

19

That money isn’t backed by labor. It’s backed by nothing more than the expectation that it will be accepted in exchange for labor. It is, in short, pure fiat currency. The slightest shock to the Ithaca economy, the slightest suspicion that the hours units are being inflated, and that fancy paper becomes just that. At least US dollars are backed by ICBM’s, and in the long run not even that will be enough.

It occurs to me that Ithaca’s proximity to the Canadian border has infected it with the “social credit” crap that liberty student’s evil countrymen like to export, along with pudgy, white comedians.

Perfidious Canada!

20

Apparently, they also have 0% interest business loans! And free grants as well!

I wonder what’s the discount at which they are traded.